Welcome to The Corona Correction Series in association with Refinitiv, I'm your host, Roger Hirst. On May 27th Ursula von der Leyen, the European Commission President, unveiled details of a European rescue fund. At 750 billion euros, it went further than the original proposal outlined by German Chancellor Merkel and French President Macron a week earlier. The initial announcement had surprised markets because the proposal was at the European Union and not the eurozone level, and at its core was 500 billion of non-refundable grants. Germany appeared to be supporting a form of EU debt mutualization, having historically resisted this course of action. I asked Refinitiv's Chief Industry & Government Affairs Officer Sherry Madera, about the announced package and its beneficiaries. 

We had a big announcement from Europe. The European recovery fund was announced, which equates to seven hundred and fifty billion euros, which is about 500 billion in grants and 250 billion in loans. Why this is significant is it sits beside the European budget, which is one point one trillion euros. And this is called the MFF, the multiannual financial framework in EU parlance. The European Commission suggests that paying this back is going to be through lifting its own resources ceiling. So the EU's own central main revenue is based on duties, levies, that and national contributions. And in this debate is referring to what's going on in Brussels and Brussels tax raising powers. So this extra bonus of the EU recovery fund does sit alongside the existing budget, which has been negotiated since 2018 and is looking to reach a conclusion by the end of this year. The end of 2020. So this is adding more complexity to the mix. This EU recovery fund, and indeed how it's being allocated and agreed to, is a process that's unfolding. What has already happened in the first five months, almost five months of this year to 2020, is there has already been an increase in issuance of debt by Italy, Spain and France. In fact, it's almost doubled the issuance of France's debt in comparison to twenty nineteen levels. Refinitiv data also shows a significant increase in Italian debt issuance versus the same period last year. And Spain's staying equal. So again, countries who are in need of being able to have their own recovery funds are getting on with it. But of course, the big prize is on understanding how the allocations from the EU, which will come at a cheaper repayment rate, how that is going to be able to be sufficiently allocated in the coming years. One of the big questions is who are going to be the winners and losers out of this? And it certainly is a question that is still only getting proposals and pontification. None of this has been agreed yet. However, if we can assume that it will be allocated according to the MFF key, and that's what's been suggested so far by the European Commission, it looks like Italy is the biggest winner, both in terms of grants and in terms of loans. And second to that is Spain. Spain would also be a big recipient both in grants and in loans. France will be coming in third, but notably would have no loans associated, really only the grant portion. And it moves down further. The question is, how is this going to be perceived? How is this going to be affected in terms of the relationships across the EU and the sense of need? If we look at those countries that are affected by COVID, the confirmed COVID deaths per million, Italy, Spain, France certainly are contributing at the high end there. The fourth country in the list of perhaps how this grant and loan will be allocated is Poland, which has notably a significantly lower COVID deaths per million statistic as well. All of this data coming from Refinitiv, both in terms of the numbers of the possible allocations, but also so that the data that's being compiled on a regular basis through our COVID app, indicates that there could be some friction within the EU in terms of how these allocations might play out. Typically, let's remember that most of the beneficiaries of a European budget are the Eastern European nations, whereas if the indications in terms of allocation going forward with this new budget, and with this new recovery fund, are looking to favor Italy, Spain and France. This is quite a big departure from the norm. So does this cause political frictions? Absolutely. But we're already seeing that in terms of the debates, and I think that the lead up to June 18th will show us actually where European nations are trying to work collectively together, and those that are looking to shore up the resources that they may need at a national basis versus looking at the EU whole. 

The proposal, which aims to combine 500 billion of grants and 250 billion of loans with the next seven year budget of one point one trillion euros, will need to overcome opposition from the 'frugal' nations of Sweden, Denmark, the Netherlands and Austria, who've already opposed the grants in favor of loans, because these include stronger incentives for the efficient use of money. Gaining support from all 27 EU member nations will take time, with the first negotiations taking place in mid-June. Althoough the 'frugal four' are likely to oppose the grants, this element already has the backing of Germany, including supportive comments for the initial Merkel/Macron proposal from the hawkish former finance minister Wolfgang Schauble. The 500 billion euros of proposed grants is still small in comparison to the size of the EU economic bloc. And it is still, at this stage, a temporary measure. But if the rescue fund is accepted in its current format, then the use of non-refundable grants may be seen as a turning point in the EU's history, with a direct transfer of capital rather than loans being seen as another step on the long road towards a fiscal union. We'll see later with another update.